Immigration and Oz: What Gives? (II)

Apologies to the readers for the delay.

"So who wins and who loses from past and current Australian immigration? (...) The actual outcome in distribution terms depends a lot on [the] use of the fiscal dividend, between increased public outlays of various kinds and tax cuts." (Garnaut, Ganguly and Kang. 2003. Pages 159 and 160).

As hinted in the previous post, the Australian Government's favorable perspective on immigration is not necessarily valid for all social groupings.

The 2003 Garnaut, Ganguly and Kang study attempted to analyze this matter, considering different areas. One of the main areas considered is taxation and fiscal policy, which we'll study here.

The chart below shows the Commonwealth cash balance (deficit/surplus) as a percentage of GDP, for the Hawke/Keating and Howard periods.

Source:
2009-10 Commonwealth Budget - The Final Budget Outcome.
Appendix B: Historical Fiscal Data. Table B1.

Excepting three years (1987-88, 89 and 90), the Hawke/Keating period saw a sustained fiscal expansion (i.e. fiscal deficits).

In contrast, the Howard period (excepting its first financial year, 1996-97,) was characterized by fiscal contraction (sustained surpluses).

About now, and following the "spending funded by taxes" logic, the reader should be asking about the origin of the money spent during the Hawke/Keating period and hoarded during the Howard period. (Find the data here, Table B1 of Appendix B).

Show Me the Money

To answer that question, one must consider that during the combined Hawke/Keating-Howard period taxation receipts oscillated over a broader 4.3 percentage point wide range (maximum of 24.1% of GDP for 2004-06, during the Howard period; minimum of 19.8% of GDP for 1992-94, under Hawke/Keating).

Non-taxation receipts, at the other hand, oscillated around a narrower 1.5 percentage point wide range (maximum of 2.9% of GDP in 1986-87, during the Hawke/Keating period, and minimum of 1.4% from 2003-04 to the end of the Howard period).

In other words: during the Hawke/Keating period the Commonwealth spent in excess of revenues, even when they had considerable non-taxation receipts (for instance, privatizations). As a consequence, it's possible that this period also had a considerable degree of "churning" (jargon for returning to tax payers, as transfers, money collected as taxes or as other Commonwealth receipts).

During the Howard period, at the other hand, the Commonwealth hoarded money, largely originated from tax receipts (as non-taxation receipts were greatly reduced by then).

Rich Man, Poor Man.

This sets the context for the following two charts, which describe the evolution of the tax-free threshold (i.e. the minimum income level, beyond which income taxes are paid) and the top threshold level (that income level beyond which taxpayers pay the top rate). In both charts, the red line indicates how much the 1983-84 threshold would be if it had been actualized with CPI variation. In blue is the actual threshold. (Data from ATO: see here)

From 1984 and up to 2005 actual thresholds increased less than their inflated versions: this is known as "tax bracket creeping".

From 2005 on, the top income threshold shot up, while the tax-free threshold remained stuck.

A "beer coaster calculation" (as some friends call this kind of exercise) can be useful to understand what this means:

1. A person who by 1983-84 earned an income of $4,500 would be just below the tax-free threshold for that year ($4,594) and would have paid no income taxes.
2. By 2005-06 the same person, earning now some $10,493 (its 1983-84 income, actualized by inflation) would have exceeded the tax-free threshold that year ($6,000) and would have paid $674 over the excess (an effective tax rate of 6.4%). So, this person has clearly lost over time.
3. A person who by 1983-84 earned an income of $36,000 (just inside the top income bracket for that year: $35,788) would have paid $12,091, for an effective rate of 33.5%.
4. By 2005-06 the same person, earning some $83,949 ($35,788, actualized by inflation) would have fallen below the top tax bracket. In the second highest income tax bracket, she would have paid $29,059, for an effective rate of 34.6%. So, this person has not seen a real change in her taxes.
5. Now, let's consider a person who, by 1983-84 earned well in excess of the top bracket threshold: $105,000. In that year, her tax bill would have amounted to $53,491, for an effective tax rate of 50.9%.
6. By 2005-06 the same person, earning now some $244,851 (its 1983-84 income, actualized by inflation) would have paid $98,630, for an effective rate of 40.3%. So, this person did see a considerable improvement in its taxes.

The examples above are clearly a simplification: the Australian tax system is extremely complex. For instance, it does not include the Medicare levy or HECS (both payable beyond a certain income level); in compensation, it doesn't include National Rental Affordability Scheme, Private Health Insurance Tax Offset, Superannuation Co-Contributions (benefiting mostly higher income earners).

Furthermore, it does not consider the GST (which adds 10% to the price of most goods and services, regardless of income, and which accounts for some 4% of taxation receipts), State taxes and municipal rates (which were greatly reduced after the GST came into effect).

As the opening quote suggests, Garnaut, Ganguly and Kang considered a potential reduction of taxes as one of the main potential benefits of the increased immigration intake.

With its limitations, the calculations above give reasons to suspect that immigration has not been accompanied by a tax bill reduction for all Australians (or for the migrants themselves).

It seems some people are getting a much better deal.

Next post in this series (no promises about the date!!): how about wages?


Update:

This feedback did not take long to come and it's a very good one, too.

The numerical examples were based on the taxation rules applying in 1983-84 and 2005-06.

As the tax-free threshold remained constant on $6,000 since then, currently our hapless low-income earner is paying more than 6.4% (7.2% in the 2008-09 financial year).

The second tax payer improved some, but not much: effective taxes now of 32.2% (versus 34.6% in 2005-06). 

But things do get better for the higher earning taxpayer: from paying 40.3% in 2005-06, it came down to 36.5% (2008-09).